Strategizing Multinational Tax Risks

Click to access pwc-g20-international-tax-symposium.pdf

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G20 Int’l Tax Symposium: BEPS topics

May 25, 2015

The G20 recently held a symposium including 300 participants from 60 countries. The G20 tax agenda focused on the current status of BEPS in developed, and developing, countries. The PwC summary outlines the current state of agreement, and disagreement, with the proposed BEPS Guidelines.

Key observations:

Hybrid mismatches will include treaty changes and domestic law recommendations
The interest limitation solution is not yet adequate
A clear analytical framework should be used to determine application of non-recognition transactions
The Amadeus database, macro-data and tax return data was used to measure the spill-over effect of BEPs
Not all measures to tackle BEPS will be supported by guidance, although guidance will continue in following years
Coordination and consistency of application is vital, although it is challenged by unilateral actions of residence countries
Implementation is key, although a single approach no longer works

The observations cited in the PwC summary are insightful, while providing further certainty that BEPS implementation will be diverse with different timelines, while guidance continues in post-2015.

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Click to access revised-discussion-draft-beps-action-6-prevent-treaty-abuse.pdf

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BEPS Action 6 (Treaty Abuse), as revised

May 23, 2015

OECD’s latest draft on Action 6 of the BEPS Action Plan (Prevent Treaty Abuse) addresses previous questions raised and comments received, in addition to some new proposals. Part I of the draft presents the alternative “Simplified” Limitation on Benefits (LOB) Rule, while Part II outlines the previous 20 questions for follow-up work, including changes to domestic law made after the conclusion of a treaty.

Succinct comments are to be submitted by 17 June 2015. A link to the draft is provided:

The discussion draft is very comprehensive and principle based, including additional examples from its previous draft.

However, it is worth noting that the OECD would not require an approval process for application of the subjective principal purposes test (PPT) (i.e. the state may “wish” to apply such process) and that the PPT would be included in the arbitration mechanism of paragraph 5 of Article 25, although this issue should also be discussed as part of the work on Action 14 (Make dispute resolution mechanisms more effective). This latter point would seem to be area for additional confirmation in providing comments to avoid double taxation on issues that are inherently subjective.

The draft will provide important precedent in obtaining treaty relief in a post-BEPS era, thus the proposals should be reviewed in detail, with consideration to provide succinct comments.

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US Model Income Tax Convention: A new world

The US Dept. of Treasury has released drafts of its proposed revisions to the US model income tax convention, for which it has requested comments. The new Model treaty will serve as a template for future US treaties and protocols. A PwC summary and US Treasury press release, which further reference the proposed changes, are included for reference: http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-us-treasury-proposes-changes-us-model-income-tax-convention.pdf http://www.treasury.gov/press-center/press-releases/Pages/jl10057.aspx Key observations:

Exempt permanent establishment (PE) rule that will also apply to US branches
Denial of treaty benefits re: articles 11 (Interest), 12 (Royalties), and 21 (Other income) for recipients in a “special tax regime.” There are several exceptions applicable to the general rule.
Disallowance of treaty benefits for payments of dividends, interest, royalties and other income for 10 years after a company expatriates.
Changes to Limitation on Benefits (LOB) article: (i) New derivative benefits test which is inclusive of a base erosion test, (ii) a base erosion test to the subsidiary of a public company requirement, (iii) changes to base erosion requirements in the public company test, ownership base erosion test and derivative benefits test, and (iv) a change to the discretionary grant of relief clause inclusive of a principal purpose test.
Partial termination provisions for subsequent law changes exempting, or reducing the tax rate to less than 15% for dividends, interest, royalties and other income.

These significant changes represent acknowledgment of the OECD BEPS impact and its impact on the world’s tax treaties that will directly impact the taxation of a multinational company’s global structure. Accordingly, these changes are required reading for international tax practitioners, as the rest of the world will be following along in measuring its respective treaties and new protocols. BEPS Action 6, Preventing treaty abuse, recognized the US Model Treaty’s LOB article, with an additional inclusion for a derivative benefits test. The US proposal has now addressed that intent.

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http://www.accountingtoday.com/blogs/debits-credits/news/corporate-tax-pros-concerned-about-reputations-74589-1.html

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Reputation Risk: Insights

May 19, 2015

A recent Accounting Today article cites the uneasiness of corporate tax leaders re: reputation risk.

Excerpts from the article:

The company’s tax policy and principles are being enhanced with greater detail for clarity and transparency
Communication of tax strategies to the Board is becoming a primary focus
Tax controversy alignment with the Board is being communicated more frequently
Increased objective to develop more co-operative working relationships with tax authorities
Tax risk is an integral part of decision-making

A link to the article is attached for reference:

As BEPS Actions are currently being transformed into final Guidelines, the subject of reputation risk would be a worthy topic of focus in the interim to be prepared for an uncertain, complex and disparate trend in the world of international tax.

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Click to access 2015G_CM5447_Indias%20Delhi%20Tribunal%20rules%20BEPS%20is%20a%20tax%20policy%20consideration%20and%20not%20relevant%20for%20judicial%20determinations.pdf

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BEPS is ideology, not law: India’s Delhi Tribunal affirms

May 18, 2015

As the OECD BEPS Actions are a subject of discussion by tax administrations, the Indian Delhi Tribunal confirmed that such ideologies cannot be used as legislative doctrines for legal enforcement.

A non-legislative BEPS approach may become more common in the months/years prior to a country enacting such legislation into its regulatory framework. However, the BEPS concepts should not be used as a basis for assessment or litigation. Thus, there will be a short/long lead time, different in almost every country, as to when some, if any, of the BEPS Actions are enacted. This disparity should be recognized prior to raising BEPS concepts as an instrument of legal enforcement.

An EY Global Tax Alert provides additional information about the case.

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Tax Transparency: Pension/Institutional focus

May 17, 2015

The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties. A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.

“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”

management and minimisation strategies.http://www.lapfforum.org/news/lapff-seeks-tax-transparency-from-ftse-100

This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc. This topic relates directly to reputational risk, and should be aligned with the Board and senior management.

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Click to access revised-discussion-draft-beps-action-7-pe-status.pdf

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BEPS Action 7: PE, Round 2

May 15, 2015

The OECD has released its second draft, following its initial draft on 31 October 2014, on BEPS Action 7: Preventing the Artificial Avoidance of PE Status. Comments, which should be kept as short as possible, on this latest draft should be sent by 12 June 2015. The discussion draft, and related comments, will be discussed at the Working Party 1 meeting of 22-26 June 2015.

A link to the latest discussion draft is provided for reference:

Key observations:

Objective is to address commissionnaire arrangements and fragmentation of operations to meet the “preparatory and auxiliary” exception.
Alternative PE options from the first draft have been reduced to 1 proposal re: each PE avoidance strategy, concluding that Option B re: commissionnaire arrangements, Option E re: specific activity exemptions and Option J re: fragmentation are the best models.
Follow-up work on attribution of profits issues re: Action 7 would result in additional guidance by the end of 2016, the deadline for negotiation of the multilateral instrument.
Low-risk distributor arrangements are to be addressed in Action 9, Risks and Capital.
Par. 5 alternative test: Independent agent exception is disregarded if it meets a control (50 % or more interest) test. Persons (acting on behalf of an enterprise) habitually concluding contracts or habitually negotiating the material elements of contracts can lead to a PE, disregarding the act of formal conclusion/approval/review in another jurisdiction. “Contracts” refers to the business proper of the enterprise.
Each specific activity exemption would be restricted to activities that are otherwise of a “preparatory or auxiliary” character. Additional Commentary guidance and examples are provided re: the phrase “preparatory or auxiliary.”
Re: splitting up of contracts for the 12-month threshold, the concept of “connected enterprises” replaces “associated enterprises” along with anti-abuse rules for determination.

The above captions provide only a snapshot of the detailed proposals and changes included in this latest draft; accordingly all interested parties should review this draft carefully and consider providing succinct comments for consideration in the final guidelines.

As PE is a strong pillar in the foundation of transfer pricing, this draft will chart the course for future PE determinations that may impact current organization structures and where profits from certain activities are taxed.

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http://www.budget.gov.au/2015-16/content/glossy/tax/html/tax-05.htm

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Australia’s Budget: BEPS acceleration

May 13, 2015

Australia’s Budget reveals its intent on becoming a leader in tax transparency and implementation of tools to address anti-avoidance initiatives. The provisions cite OECD BEPS initiatives, while deciding to act unilaterally on draft guidelines and introducing new transparency standards within its various proposals.

This Budget may set the stage for others to follow similar trends and timelines; accordingly such actions should be monitored in Australia as well as the rest of the world. The Public Tax Transparency Code is another signal that reporting of economic and tax activity will be used as a public measure to assess reasonableness for determining payment of a “fair share of tax.”

MNE’s have now fully realized the impending complexity, documentation demands and transparency standards that it will be judged by. Internal education, communication and alignment are now vital in establishing a MNE’s global tax risk framework.

A link to the Budget actions is provided for reference:

Key Corporate Tax provisions:

Multinational Anti-Avoidance Law
- Economic Australian activities = Australian taxation income
- Penalties up to 100%, plus interest

Country-by-Country (CbC) reporting effective as of 1/1/2016, consistent with OECD Guidelines
OECD recommendations re: treaty abuse / non-taxation to be incorporated into tax treaties
Draft OECD anti-hybrid rules to be implemented
Public Tax Transparency Code to supplement CbC reporting
Serious Financial Crime Taskforce to target serious financial crimes and tax evasion
Common Reporting Standard to be adopted from 1/1/2017
GST Compliance programme extended 3 years

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OECD / UN, Transfer Pricing

Click to access TNF%20APA.pdf

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Indonesia APA: Methodical approach

May 12, 2015

The Indonesian Minister of Finance has released recent Regulations addressing the methodical approach for which taxpayers and the tax administration are to be aligned in seeking an APA. Most importantly, the approach outlines the advance timing and necessary information by which tax authorities will utilize in considering APA requests.

A link to KPMG’s Tax News Flash is provided for reference:

As countries continue to enact unilateral legislation, with or without BEPS Actions, it may be prudent to consider a proactive transfer pricing approach to enter into APA’s for significant intercompany transactions. As the Mutual Agreement Procedure (MAP) procedures are still being refreshed, the transition period would be an excellent time to prepare for additional certainty via APA’s. The Indonesian approach provides an excellent example to better appreciate the timing, information and exchanges that will become part of this process.

Armed with the foresight that such APA’s may be included in transfer pricing documentation and exchanged between tax authorities around the world, it may be a worthwhile roadmap demonstrating consistency for significant transactions.

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Transfer Pricing

http://www.theguardian.com/australia-news/2015/apr/19/australia-working-with-uk-on-tackling-corporate-tax-says-joe-hockey

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Australia, UK DPT: Advancing beyond BEPS

May 10, 2015

The recent Guardian article highlights the danger that the UK Diverted Profits Tax (DPT) has incited. Countries are acting unilaterally and/or in working groups (including the EU) to accomplish their fiscal objectives behind a thin veil of BEPS intentions. Most importantly, such actions may never be unraveled after the final OECD BEPS Guidelines are published.

Accordingly, we will have overlapping domestic and treaty provisions (including the arguable non-treaty DPT) for anti-avoidance rules, CFC rules, capturing low-taxed income from other jurisdictions in novel ways, non arms-length approaches, formulary calculations of the “right tax” and significant complexity for all. To the extent public disclosure of tax related data becomes a reality by the OECD or EU, many questions will arise on a very complex topic for which most people will not comprehend.

It is hopeful that countries put a full stop on BEPS activities until the Guidelines are finalized, after which such Guidelines can be adopted in their final form for overall consistency. Statements similar to the herein should be tempered by patience and a goal for global consistency. Thus, working group meetings that are scheduled prior to that time will only exacerbate the tsunami of international tax guidance and documentation that will take place.

A link to the article is attached for reference:

Joe Hockey, treasurer, provided the following statement:

Hockey said that the joint working group would enable Australia to go “further and faster” than the framework for change offered through multilateral groups like the OECD and G20.

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Click to access TEI%20Comments%20BEPS%20Action%203%20-%20CFC%20Rules%20FINAL%20to%20OECD%2030%20April%202015.pdf

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BEPS Action 3-CFC Rules: TEI comments

May 7, 2015

TEI has provided recent comments addressing OECD’s Discussion Draft for BEPS Action 3: CFC rules. A link to their comments are provided for reference:

Key comments:

Lack of definitive guidance will introduce additional complexity, double taxation and inconsistency of treaty applications.
Overlap with other BEPS Actions and the role of CFC rules questions new complex rules at this time.
Confusion re: transfer pricing rules and excess profits approach with arm’s length principle.

The well drafted comments provide clarity surrounding the complexity and uncertainty for new rules addressing BEPS concerns by interested parties. The first question therefore should always be: Do we need these rules at this time?

Notwithstanding the Discussion Draft’s proposals and comments by TEI, among others, MNE’s should plan for increased efficiencies to coordinate and report information, while ensuring global consistency for application of transfer pricing methodologies.

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http://europa.eu/rapid/press-release_SPEECH-15-4900_en.htm

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European Commission: Transparency blueprint

May 4, 2015

Commissioner Moscovici’s recent speech addressing the future of tax policy aims at developing an ambitious blueprint for taxation in Europe. A link to his speech is provided for reference:

Key comments:

Enhanced EU transparency in tax matters
Coordination of Member States tax systems
Cooperation between Member States, exemplified by EU Tax Transparency Package initiative (refer to 22 March 2015 post)
Full transparency cost/benefit assessment re: Country-by-Country reporting for public disclosure
New Action plan before summer (an issue that is fundamental to the EU) building on global developments
Assess relaunch of Common Consolidated Corporate tax base (CCCTB)

The European Commission is accelerating its efforts, resulting in a potentially different documentation framework than the OECD Guidelines may suggest and/or a basis that the rest of world will follow. The Commission has the necessary momentum and political cohesiveness to achieve its efforts for the EU, although with a possible demarcation with the rest of the world.

CbC reporting by MNE’s continues its actions on center stage as MNE’s should plan for (if they have not already) public disclosure of such reporting. Thereby, the topics of supplemental reporting (i.e. indirect tax contributions, etc.) become more important for senior leaders to consider. Finally, such disclosure warrants a seamless governance process and alignment for addressing future questions by interested parties.

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Transfer Pricing

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BEPS Action 12-Mandatory Disclosure: TEI comments

May 2, 2015

Tax Executives Institute (TEI) has provided comments to the issuance of BEPS Action 12 Discussion Draft.

A link to TEI’s comments is provided for reference:

Key comments:

Multiple levels of disclosure options are provided, leading to inconsistency and complexity
Information provided is yet another compliance burden for MNE’s, with little cost/benefit to tax authorities
Concern about release of information to the public, especially prior to the time that full appeals are exhausted
Tax disclosure should only be required upon filing a tax return with a tax benefit from a reportable transaction
Limited rules re: who should report
Primary purpose or de minims filter process is not recommended
Reporting should be limited to new or innovative aggressive tax planning structures
Countries with criminal liability provisions should exclude reported transactions with self-incrimination protection
Penalty protection for reported transactions

TEI’s comments are well written, concise, practical and relevant. Their comments should be carefully reviewed prior to implementation of additional disclosures re: BEPS Action 12 that may prove to have little benefit and significant complexity.

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Click to access pwc-france-mof-transparency-measures.pdf

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Audit Mutuality: France provides leadership

May 1, 2015

The French Ministry of Finance has released welcome initiatives comprising a list of aggressive tax structures, ten commitments for ways of working upon commencement of an audit, appointment of a national committee of experts in complex cases, and creating a R&D tax credit advisory board to provide consultation services to the taxpayer.

A link to PwC’s Tax Insights summary is provided for reference:

10 Audit commitments:

Initial meeting to inform taxpayer of documents to be requested
Ways of working in the tax audit
First meeting devoted to understanding the business
Milestone meetings
Indicating the main audit objectives
Taking consistent positions of similar issues in the same industry
Meeting deadlines
Providing a recourse process with access to auditor’s superior
Maintaining confidentiality and tax secrecy as imposed by the law
Identifying an individual within FTA for post-audit support procedures

This is a very welcome initiative that will provide win-win opportunities for audits and information requested. Additionally, this process serves as a Best Practices memorandum of understanding that should be discussed with auditors from other jurisdictions.

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